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Economics - Definition of Common Terms

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Please help with the following:

1. Define the following terms:

Gross Domestic Product (GDP)
Real GDP
Unemployment rate
Inflation rate
Interest rate

2. Explain how the circular flow diagram illustrates the interaction of households, government, and business.

Answer should be approx. 700-800 words in length.

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Solution Summary

GDP, unemployment, and interest rate definitions; circular flow diagram

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Gross domestic product (GDP) equals consumption expenditures plus private domestic investment plus government purchases of goods and services plus net exports. There are three methods of measuring GDP: Expenditure Approach (measures GDP as the sum of expenditures on final goods and services); Income Approach (measures GDP as the sum of incomes of factors of production); and Value-added Approach (measures GDP as the sum of value added at each stage of production.

When GDP is adjusted for inflation it is then "real GDP." In essence, before the adjustment for inflation, we don't know how much of the increase in expenditures was due to inflation. By using the GDP deflater, we can find out how much GDP really increased.

While real GDP measures the output of an economy, it doesn't necessarily indicate that the average citizen is better off. For this, we would need to know the real GDP per capita. If population is increasing, real GDP per capita may be declining, even while real GDP is increasing.

The unemployment rate measures the percentage of those in the labor force actively looking for work. People who aren't employed can be either unemployed or not within the labor force. Those too young or too old to work are not considered part of the labor force, and thus are not considered unemployed. The government considers only those actively looking for work as unemployed. If a person has sought ...

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